From: Firefrog .

I have asked this question recently with some good replies but I still don't get it!

What happens to equity when you access it.

If I have a house (prop1) with say 30K equity and wish to buy an IP (prop2) using that 30K to cover deposit and costs, how is it used. Does the loan on prop 1 increase by 30K and you transfer that cash to prop 2. or what???

I seem to be struggling to understand the technical aspects of using equity, I know it can be done and I know that there are several ways. Please help me to finally grasp what happens here.


The Frog


You can achieve far more than you allow yourself to believe. - David Pollitt
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Reply: 1
From: PT Bear

My understanding of equity is a little thin, but here's how I'm using it for a current deal:

When I bought my first property, it's value was $210k. I borrowed $180k. My lending ratio was 180/210 = 85.7%. Then equity I had in my property (the part that I own) was $30k.

I bought in a good area but only paid the interest (so none of my loan has been paid). The property value is now $230k. The lending ratio is 78% and the equity is $50k.

I want to buy another property for another $210. I have enough in savings to pay for the legals and other costs, but I want to borrow 100% of the value. The bank will only lend to a total ratio of 90%.

I borrow against the equity in my current property. The actual amount of that loan doesn't change, but it allows me to borrow 100% of the value of the new property. Thus my total borrowing looks like:
180k + 210k = $390k

Total value:
230k + 210k = $440k

My total lending ration is:
390/440 = 88.6%

I'll have to pay mortgage insurance but I'll be able to take control of both properties (assets). My current plan is to make some inexpensive changes to the second property and get it's value to at least $235k (actually, I'm estimating > $250k). At which point I can negotiate with the bank to make it independent from the first property.

The total rents I anticipate will also cover the interest and costs.

Like I said, I'm still coming to grips with some of the equity concepts myself, but for me this is a good starting point. I'd be very interested to hear how other people do this sort of thing.

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Reply: 2
From: Mr S


The best way for me to explain what happens is to show you the calculation.

For example.

Your house valued at $100,000.00
You have paid off $45,000.00 and you still owe $55,000.00

ie. equity = $45,000.00

Bank/Lender will lend you 80% of total properties without Mortgage Insurance and taking into consideration your capacity to service the loan.

So you now want to buy an IP valued at $100,000.00

Bank view - House($100,000.00) + IP($100,000.00) = $200,000.00 worth of property.

So $200,000 x 80% = $160,000 This is the total the bank will lend.

You currently still owe $55,000 on the house.

So bank will give you $160,000 minus the $55,000 you currently owe.

ie they will give you $105,000.00 for the IP even though it is only worth $100,000.00

The extra is for fees.

Cheers - Martin
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Reply: 2.1
From: Scott Marshall

To minimize mortgage insurance ( which is tax deductable anyway ) eg.
home 100k
owe 50k
borrow on equity 40k (with MI)

buy an IP 180k + costs (without MI)
Repay 50k, then 40k, then 180k.
also separates home from IP

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Reply: 2.1.1
From: Firefrog .

Do I have this correct that the equity is not physically moved or re financed or anything like that. It is simply taken into account when the calculations are done to finance your IP.

Does the financier have a claim on the equity in this situation or is it independent and could be liquidated after the IP purchase (not suggesting that's a good idea just helps me grasp this thing).

Or do I still have this all wrong

The Frog


You can achieve far more than you allow yourself to believe. - David Pollitt
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From: GoAnna !

Hi the Frog

Hope this lessens rather than increases the confusion.

There are 2 things under discussion here. Security and loan structure.

Without LMI banks are usually happy to lend up to 80% of valuation. 80% of ALL your properties. So bank valuation x 80% = equity. Equity - current borrowings = available equity.

Loan structure is how you set up the loans against those securities. You might have one loan for 106% secured against both properties. Banks would prefer you do this however it makes it difficult to untie them at a later stage. And they may hold a level of security well in excess of your loan amount.

You may choose to have 80% secured against the new ip and 20% plus costs secured against the other property. The 20% plus costs might be in the form of a LOC or a standard variable or fixed loan.

Keep in mind that banks will suggest or insist upon an arrangement that suits them. You need to work out what will suit you and push for that.

And yes if you did not pay the bank does have a claim against both properties and may choose to liquidate one or both to recover their money.

GoAnna !
Why not go out on a limb, that's where all the fruit is. (Mark Twain)
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